2017.09 DETAI NEWENERGY

Company Name: DeTai New Energy Group Limited
Stock Code: 00559
Year end: June 30, 2017

Basis for Qualified Opinion

Acquisition of Emission Particle Solution Sweden AB

As disclosed in Note 35 to the consolidated financial statements, during the year, the Group acquired the entire equity interest in Emission Particle Solution Sweden AB (“EPS”) at consideration of SEK239,000,000 (equivalent to approximately HK$202,186,000), in which (i) SEK101,200,000 (equivalent to approximately HK$85,612,000) has been settled by cash on 22 December 2016, and (ii) SEK137,800,000 (equivalent to approximately HK$116,574,000) which was the acquisition date fair value of contingent consideration payable by the Group. The amount of contingent consideration payable is subject to post acquisition adjustment mechanism and will be payable by cash.

EPS is principally engaged in the manufacturing and distribution of a vegetable additive product.

(i) Fair value of intangible assets acquired at the date of acquisition of EPS

As detailed in Note 15 to the consolidated financial statements, the management of the Group determined the fair value of the intangible assets of EPS, being production formula, non-competition agreements and sales backlog agreements, at approximately totalling HK$186,863,000 at the date of acquisition by using respective valuation bases and inputs for each of these intangible assets. Deferred tax liabilities of approximately HK$41,110,000 were recognised at the date of acquisition as a result of the recognition of these intangible assets.

We have performed audit procedures set out in Hong Kong Standard on Auditing (“HKSA”) 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the estimation of the fair value of these assets was prepared, and test/consider the data based on which the fair value of these intangible assets was estimated. However, we were not provided with sufficient appropriate evidence relating to the completeness and accuracy of the data used in the estimating the fair value of the intangible assets. Due to the limitations on our scope of work, we were unable to evaluate whether the fair value of these intangible assets of EPS were appropriately estimated and whether the related deferred tax liabilities were properly stated at the date of acquisition.

Any adjustments to the fair value of these intangible assets found to be necessary would have consequential effect on the amount of goodwill, if any, and deferred tax liabilities recognised at the date of acquisition and at 30 June 2017, the amortisation charge of the intangible assets and the correspondence deferred tax charge for the year ended 30 June 2017, the net assets of the Group as at 30 June 2017 and the net loss of the Group for the year ended 30 June 2017, and the related disclosure.

(ii) Fair value of financial liabilities at fair value through profit or loss at the date of acquisition

At the date of acquisition, the Group had recognised the fair value of the contingent consideration payable for the acquisition of EPS of approximately HK$116,574,000 as the financial liabilities at fair value through profit or loss. The actual amount of contingent consideration payable is calculated with reference to the net profit after tax of EPS for the period from 1 January 2017 to 31 December 2017 and the profit target agreed in the acquisition of EPS. SEK137,800,000 (equivalent to approximately HK$116,574,000 at acquisition date) represented the maximum amount payable (i.e. the profit target is met) and without taking account of the time value effect.

The fair value of the financial liabilities at fair value through profit or loss at the date of acquisition was determined by the management of the Group by reference to a valuation report prepared by an independent professional qualified valuer based on the forecast of EPS performance for the period from 1 January 2017 to 31 December 2017 prepared by the Group’s management (the “Forecast”). We have performed audit procedures set out in HKSA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the Forecast was prepared, and test/consider the data based on which the Forecast was prepared and the fair value of the financial liability was estimated. However, we were not provided with sufficient appropriate evidence relating to the accuracy and relevance of the data used in estimating the fair value of the financial liabilities. Due to the limitations on our scope of work, we were unable to determine whether the fair value of financial liabilities at fair value through profit or loss was appropriately stated at the date of acquisition.

Any adjustments to the fair value of the contingent consideration payable at acquisition date found to be necessary would have an effect on the fair value of the purchase consideration for EPS and the amount of goodwill, if any, at the date of acquisition, and the related disclosure.

(iii) Impairment assessment of goodwill as at 30 June 2017

As at 30 June 2017, the carrying amount of goodwill and intangibles assets acquired arising from the acquisition of EPS amounted to approximately HK$58,602,000 and HK$192,164,000 respectively. In the preparation of the consolidated financial statements, the management of the Group has performed an impairment assessment on the cash generating unit (“CGU”) to which the goodwill and intangible assets belong. According to the Group’s accounting policies, the impairment assessment is by comparing the CGU’s carrying amount to the CGU’s recoverable amount. The recoverable amount of the CGU as at 30 June 2017 was determined by the management of the Group by reference to a valuation report prepared by an independent professional qualified valuer based on a cash flows forecast developed by the Group’s management (“the Forecast”). With reference to the result of the impairment assessment, the management of the Group considered that there is no impairment on the CGU as at 30 June 2017.

We have performed audit procedures set out in HKSA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the Forecast was prepared, and test/consider the data based on which the Forecast was prepared and the CGU’s recoverable was estimated. However, we were not provided with sufficient appropriate evidence relating to the accuracy and relevance of the data used in estimating the recoverable amount of the CGU. Due to the limitations on our scope of work, we were unable to determine whether the recoverable amount of the CGU was appropriately estimated and whether recognition of impairment losses on the assets included in the CGU including the goodwill was necessary as at 30 June 2017.

Any impairment loss recognition found to be necessary would reduce the carrying amount of goodwill, and may also reduce the carrying amounts of other assets in the CGU including the intangible assets and the corresponding deferred tax liabilities as at 30 June 2017. The net assets of the Group as at 30 June 2017 and the net loss of the Group for the year ended 30 June 2017 would also be adversely affected.

(iv) Fair value of financial liabilities at fair value through profit or loss as at 30 June 2017

As at 30 June 2017, the Group’s financial liabilities at fair value through profit or loss (see (ii) above) amounted to approximately HK$127,431,000, the fair value which was determined by the management of the Group by reference to a valuation report prepared by an independent professional qualified valuer. The valuation report was based on the forecast of EPS performance for the period from 1 July 2017 to 31 December 2017 prepared by the management of the Group (the “Forecast”). We have performed audit procedures set out in HKSA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the Forecast was prepared, and test/consider the data based on which the Forecast was prepared and the fair value of the financial liability was estimated. However, we were not provided with sufficient appropriate evidence relating to the accuracy and relevance of the data used in estimating the fair value of the financial liabilities. Due to the limitations on our scope of work, we were unable to determine whether the fair value of the financial liabilities at fair value through profit or loss as at 30 June 2017 was appropriately stated. – 37 – Any adjustments to the fair value of the financial liabilities as at 30 June 2017 found to be necessary would have an effect on the net assets of the Group as at 30 June 2017 and net loss of the Group for the year ended 30 June 2017.

Qualified Opinion

In our opinion, except for the possible effects of the matters described in the “Basis for Qualified Opinion” section of our report, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 30 June 2017, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.